If you’ve ever wondered whether you should stick with index funds or try picking a few individual stocks, Mohnish Pabrai has some thoughts—and they’re worth listening to. In his book Mosaic: Perspectives on Investing, Pabrai dives into this debate with the help of some wisdom from Warren Buffett and Charlie Munger.
Pabrai opens with a classic Buffett example. Back in the day, Buffett would put huge chunks of money—like 40%—into a single stock. That’s not a typo. Forty percent of the Buffett Partnership’s assets once went into American Express. And Charlie Munger? He’s even more hardcore. He believes that “3-4 stocks are all that are needed to have a stellar portfolio.” That’s a bold stance in a world where people are told to diversify or die.
To drive the point home, Pabrai shares the story of Woodrow Wilson, a former CEO of Coca-Cola. When someone asked him if it was a good time to sell Coke stock, he said, “I don’t know. I’ve never sold any.” And it turns out, neither has the Wilson Foundation—it’s still over 90% in Coca-Cola stock.
The results? They’ve crushed the market. Similarly, Buffett plans to leave almost everything to the Buffett Foundation, which will also be 98% in one stock: Berkshire Hathaway.
So does this mean you should go all in on a few companies? Maybe. But probably not—unless you really know what you’re doing. As Buffett puts it, “Intelligent investing is not complex, though that is far from saying that it’s easy.”
You don’t have to be an expert on everything, just on the businesses you’re betting on. “You only have to be able to evaluate companies within your circle of competence. The size of the circle is not important; knowing its boundaries, however, is vital.”
That last part is key. Pabrai points out that while the approach sounds simple, most people still underperform. One study tracked 78,000 investors and found they lagged the market. Pabrai doesn’t sugarcoat it: “Most individuals would do better with an index fund.”
But if you’re the kind of person who can buckle down, do deep research, and stay patient, there’s another path. “Investors who take the time to study and then only invest in a few outstanding businesses… and then hold those businesses for a long time, will come out ahead,” Pabrai writes.
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